CARTERET, N.J. -- Pathmark Stores, the retailer here with a history of troubled takeovers, may be heading that way again.
A proxy voting service last week released a report recommending that Pathmark shareholders vote against an investment by Yucaipa Cos., saying Pathmark's board acted too hastily when it unanimously approved the proposed acquisition. The report arrived on the heels of a shareholder's request that Pathmark allow it to further investigate an unnamed private bidder that has continued to bid on the company -- including a revised offer as recently as May 19 -- long after the board approved the Yucaipa transaction in March.
"We do not believe that the company presented a compelling case that it extracted the maximum value for shareholders from the bidding process," said the report last week from Institutional Shareholder Services, a corporate governance firm based in Rockville, Md.
Pathmark shareholders will vote on the proposed Yucaipa deal in a special meeting June 9. A majority vote is required for approval. Officials of Pathmark and Yucaipa were unavailable for comment late last week.
It was unclear last week what if any effect the report may have on the sentiment of Pathmark shareholders. In general, Wall Street has reacted favorably to the news of the Yucaipa investment, with Pathmark stock more than doubling in price, and trading last week near 52-week highs of more than $9 a share. "The market has been saying, 'Yucaipa is a great idea,"' one source told SN last week.
But Pathmark has seen such proposals unravel before. In 1999 an announced takeover by Ahold fell apart when Ahold expressed concern about divestitures it would need to make in order to satisfy federal regulators and Pathmark subsequently filed for bankruptcy.
Twelve years earlier, a hostile takeover attempt from the Dart Group was thwarted by a management-led leveraged buyout that left the company deeply in debt.
At issue in the ISS report is the board of director's handling of the bidding process. As detailed in a proxy statement from Pathmark, Yucaipa played an aggressive role in the process, insisting upon and receiving a period of exclusive negotiation with Pathmark during which it nailed down a deal, as well as a "force the vote" provision that required Pathmark to put the proposal to a shareholder vote whether or not the board approved.
However, those actions came while other bidders were still in play, some of whom continued to increase their offers even after the Yucaipa deal was approved. This appeared to have forced Pathmark into an awkward position whereby it could entertain further offers only at the risk of violating the terms of its agreement with Yucaipa.
But the offers continued to roll in. The proxy statement noted that one such suitor, a private investment firm identified only as "Bidder No. 2," in early April submitted an offer of $8 per share for the entire company. But while Pathmark was in discussions with that bidder, Yucaipa threatened legal action, demanding that the talks stop and that Pathmark issue proxy materials and set a date for a shareholder vote.
At the same time, Pathmark said, Bidder No. 2 informed the company it still needed more than a week to complete its due diligence. Pathmark subsequently ended talks with the bidder, citing the extended time to complete due diligence and close a deal, and because Pathmark stock had by then been trading in excess of the proposed $8 price.
The same bidder then returned with an $8.25 offer but Pathmark rejected it, citing similar reasons. One Pathmark investor, who asked not to be identified, told SN that he felt bidders other than Yucaipa had not been aggressive enough.
"If somebody wants to buy Pathmark they should step up to the plate and put their money on the table," the investor said. "The only one willing to do that so far has been Yucaipa."
Late last week, Pathmark filed an addition to its proxy statement which sought to clear up a description of the reasons it rejected the $8.25 offer and which also revealed that Bidder No. 2, along with a co-investor, had twice increased its offers: To $8.30 per share on May 8 and to $8.75 per share on May 19. Pathmark rejected both of those offers, including the $8.75 offer last week, saying in part that the debt financing of the latest offer included provisions the company felt were not not achievable.
Financial experts contacted by SN said it was difficult to compare the offers discussed in the proxy, especially since news of them has affected the stock volatility, and because Yucaipa's offer includes warrants exercisable under certain conditions, and benefits of management expertise, that are difficult to place a value on. Yucaipa's offer calls for it to receive 20 million new shares of stock for $150 million (or $7.50 per share), along with three- and 10-year warrants to purchase additional 10% stakes at $8.50 and $15 a share, respectively, which could take Yucaipa's interest in Pathmark to 60%. Bidder No. 2's most recent offer values Pathmark at around $262.5 million.
